Saving money is the foundation of a stable financial future. Whether your goal is to jet-set around the world, purchase your first home, or secure your retirement, you need to save money to make it happen.
There are many ways you can use your money to reach your financial goals. However, some require sacrificing the liquidity of your money. For example, if you invest in real estate, you may be able to earn money down the line, but that money will no longer be in a liquid (read: available) state. If you need it for your emergency fund, you’ll be out of luck.
That’s where savings accounts come in. These accounts can be set up at most financial institutions, like a bank or credit union. When considering what to look for in a credit union, savings accounts should be at the top of your mind. They maintain your money’s liquidity while giving it the chance to earn dividends. Let’s review the reasons to open a personal savings account and the dividends you can expect.
Why Open a Savings Account?
When you have extra cash to stash away, a savings account is a convenient place to keep it. Most people don’t want to hide their money under their mattress. Not only is that risky, but it’s less financially savvy.
A savings account provides a secure place for your hard-earned money and earns interest on the principal.
When you place your money in a credit union savings account, you become a member and part owner due to the cooperative structure of credit unions. Member deposits in a savings account essentially become loans to other members of the credit union. In turn, profits earned by the credit union are returned to its members such as dividends.
You may be wondering, “How much dividends do savings accounts earn?” This is an important question to consider. You want to make sure you’re optimizing the value of your money to the best of your ability. Let’s take a look at how savings accounts work, and just how much dividends you can expect to earn with one.
How Much Dividends Do Savings Accounts Earn?
The dividends you earn within a savings account is based on a few factors. These main factors are:
- The savings account’s dividend rate – This number will be stated as a percentage and is determined by your financial institution.
- How often dividend is compounded – Dividend is compounded on a specific schedule that varies across financial institutions.
When you put these two factors together, you get a very important metric: Annual Percentage Yield (APY). If you were to just look at the dividend rate, you would see an incomplete picture. That’s why APY factors into the compounding schedule, which tells you what you’ll ultimately earn while saving money each year. It’s the best figure to compare across banks and credit unions when choosing which institution to open your personal savings account with.
The Power of Compound Dividends
One great thing about savings accounts is that your dividend is compounded. Compound dividends allows your dividends to earn dividends, rather than just the principal deposit. This means that your savings will grow faster. Dividends can be compounded on a few set schedules:
While your stated dividend rate may not be that high, compound dividend can still make a sizable impact on your earnings over time and achieve your long-term savings goals.
The History of Savings Account Dividend Rates
Savings account dividend rates have fluctuated throughout history and vary between financial institutions. Before the Great Recession, you could find savings accounts with higher dividend rates up to 8% APY!
After that economic downturn, competitive dividend rates plummeted to percentages as low as 0.02% APY. This was due to efforts taken by the Federal Reserve to maintain lower-dividend rates. The current national average dividend rate is 0.17% APY, according to the NCUA.
With these lower rates, savings accounts may not be able to keep pace with inflation. As a result, savers need to consider how important maintaining their money’s liquidity is, as investing in other assets may provide a greater return.
Which Financial Institutions Have the Highest Dividend Rates?
Banks and credit unions have different competitive dividend rates for savings accounts. In general, credit unions provide higher dividend rates, since they are nonprofit institutions. So, the money they earn can be fed back into their members’ accounts.
- Brick-and-mortar banks – These banks have the lowest interest rates. Their annual percentage yield for a regular savings account is usually as low as 0.01%.
- Online banks – With fewer overhead expenses, online or mobile banking institutions are known for offering better interest rates for savings accounts, rather than a brick-and-mortar bank.
- Credit unions – known for their comparably high-dividend rates and low monthly fees. Mission Fed’s savings account rates range between 0.10% APY and 0.50% APY.
Take Into Account Hidden Fees
While you should focus on APY, you also need to be wary of how much money you’ll spend to maintain your bank account to continue working toward your financial goals. Banks often have various types of hidden monthly maintenance fees that can slowly chip away at your earnings, if you’re not careful. Although sometimes there is a minimum balance required to keep your savings account without a cost.
Here are some of the common fees to watch out for:
- Maintenance fees
- ATM operator fees
- Paper statement fees
- Excess activity fees
- Service fees
If you choose to save with a credit union instead, you can expect reduced monthly fees and no surprises. Be sure you also understand the requirements to join a credit union before opening a savings account.
Save In a High-Dividend Rate Savings Account Today
When it comes to building your personal wealth, small decisions add up over time to reach your savings goals. A regular savings account offers a way to steadily increase your hard-earned money, while maintaining easy access to it. They’re especially helpful when you open your bank account with a financial institution that has few fees and higher APYs, like Mission Fed Credit Union. Visit our website or call today for tips on how to open a credit union account.
The content provided is intended for informational purposes. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article does not constitute endorsement, control or warranty by Mission Federal Credit Union.
Investopedia. What is the rate of return I can expect on a savings account?
Federal Deposit Insurance Corporation. Weekly rate cap information for the week of February 3, 2020.